Rules for Trading Foreign Exchange

This article provides a trader with rules for trading on the foreign exchange market.

Trading on the foreign exchange market can be incredibly exciting, but it can also be very dangerous. The high-paced state of the market can cause heightened stress which not only leads to mental ill health, but detrimental losses as well. In order to survive on this trading market, you must be aware of the different aspects in forex trading. Below are some rules or guidelines to help traders stay on track.

1. Don’t begin trading with a minimum deposit

Many new traders will use micro or mini trading accounts because of the low initial deposit required as a set-up fee. This low amount generally causes one to open large account positions in relation to the opening balance, which is incredibly risky. By trading larger positions with smaller capital you are sure to face account depletion if the trade turns bad. Instead, begin with a larger deposit and make small trades. This may not bring in the ‘big tuna’, but you will lessen the chance of detrimental losses.

2. Develop a sound trading plan

All successful business ventures begin with a strong trading plan. A trading plan, or plan of action, will provide guidelines on your trading style and can help you regain focus if you should find yourself in difficult times. It is important to stick to a trading plan in order to be successful on the market, so you must have a reliable and successful one.

3. Buying foreign exchange trading software

Automated forex software can be a highly convenient tool, especially for those traders who have other full-time commitments. However, you should always conduct extensive background research into a product before purchasing it. Due to the growth of the online forex world, many brokers and software companies are able to exploit customers. By not researching providers there is a higher likelihood you may be the victim of a scam trading software provider.

4. Using stop loss orders

All trades on the foreign exchange market contain an element of risk. This is why one must develop and implement risk management techniques. The most commonly used and well-known technique is that of the stop loss. You may think a stop loss is unnecessary, and many new traders forget to place them, however these stops can be the difference between a loss and a devastating loss. By placing a stop at the correct position in a trade you will ensure a reduced loss if a trade turns bad.

5. Maintain a trading journal

The most effective traders are those who monitor and review their trading behaviour periodically. It is important to examine your performance as a means of noting your mistakes and adjusting your strategy accordingly. The trading journal is a log whereby all trades are documented in detail including time, date, currency pairs traded, results and reasons for the trade. This will provide an insight into your trading and help you become a better trader.